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Asia: Tradition and wealth

Wee-Liang Tan is associate professor of entrepreneurship and law at the Lee Kong Chian School of Business, Singapore Management University.

Singapore's competitiveness as a nation will depend on the success of local Chinese family enterprises. Wee-Liang Tan discusses how their traditional outlook may well prove to be a hindrance to both their own long-term growth and the growth of the economy

On 9 August 2006, Singapore turned just 41 years old as a nation. It is a cosmopolitan city-state that boasts skyscrapers and attracted S$244 billion in foreign direct investments in 2003. It is also a multi-cultural country that has sought, and still seeks, to attract talent from around the globe. Yet, for all its modernity, family businesses characterise a majority of its business establishments.

The majority of business establishments in Singapore are small- and medium-sized enterprises (SMEs). Like many other countries in Asia, most of these are family-based businesses, predominantly Chinese in ethnicity, reflecting the population demographics in Singapore where 77% are Chinese, and are involved in various industries like food, transport, travelling, retailing and clothing.

Potential hindrances to growth
Chinese family businesses possess unique characteristics that are potential hindrances to growth. One distinctive feature of Chinese family businesses is familism – the predominant focus on family ties in these businesses even at the expense of other social relationships. This familism stems from Confucianism, which has defined the character of social relations within Chinese society for the past two and a half millennia. Nepotism also features in Chinese family businesses, which favours family members when delegating control, promotion, and recruitment. Business succession in Chinese family businesses is by lineage to the sons, with the daughters benefiting in exceptional cases.
Authoritarianism is another feature in Chinese family business. Business tends to be conducted in the manner of the leader of the house with unquestioned allegiance and submission by all, employees included. Confucian ethics, emphasizing respect for elders and, hence, age, is a reason for the deep respect for ­authority figures.

Frugality and hard work, leading to the accumulation of wealth, are two other notable features of Chinese family businesses. Xin Yong, referring to the ability to keep one's word, is a key foundation of Chinese business. The reputation and trustworthiness of Chinese entrepreneurs as individuals play an important part in the business. This business ethic means that the family business will honour a verbal contract and operate with others on the basis of trust. Family businesses are also noted for their distrust of non-family members, although this quality is not limited to Chinese family businesses. Distrust of non-family members manifests itself in the unity of control and ownership in the family and conservative management policies.

These distinctive features could hinder growth of Chinese family firms. Prior research on Chinese businesses in other countries have found that they are often reluctant to introduce professional management practices and wary of introducing professional managers who are not family members. Nepotism and distrust of non-family members hinders expansion of operations overseas, when the hiring of home country nationals to watch over the new operations is required. The reliance on one individual with unquestioned authority leads to a trap where the founder or family head is both a strength and a weakness, as all decisions must be referred to him. His unavailability could cripple the business. Frugality and hard work may be crucial to a business at the early stages of growth, but not when an established business is expanding. These Chinese family business qualities imply possible self-financing for expansion to be sanctioned. Xin Yong would not help expansion; professionalised firms with whom family businesses have to do business are not likely to be satisfied with something as simple as "my word is my bond".

Despite the majority of businesses in Singapore being family based, there has been little research conducted to understand the dynamics and challenges these businesses face. Drawing upon research conducted on Singapore family business through a survey of local businesses commissioned by Foo Kon Tan Grant Thornton (the FKTGT survey), we are able to provide some indications.
The survey found that 62.2% of the 177 respondents considered themselves to be family businesses. Prior to this, it was generally assumed that around 95% of business establishments are family businesses. Whether the respondents considered themselves to be family businesses is significant because family businesses have been found in other studies to be less dynamic compared to professionally managed enterprises.

We found that 68% of the 177 family based business owners surveyed were concerned with the growth of their business.. 22% of those surveyed were extremely concerned with the need to grow their business, while 46.3% were fairly concerned. A majority of them are prepared to make changes to their lifestyles for the sake of business growth.
These attitudes will enable Singapore family businesses to look for ways to develop their businesses and to realise the need for professionalising their business practices, systems and staff.

Financing growth
When asked how they were going to finance growth but at the same time retain control of the business, 46.6% were fairly concerned how they were going to do it, while 29.5% were extremely concerned. One source of funds for growth would be through the introduction of equity from outsiders. There is still a fear of involving outsiders: 79.2% of businesses surveyed were concerned with how greedy outside shareholders would be, while 75.8% were worried about how the business would be run should outside shareholders be introduced. Asia is a low trust society. Family businesses will thus only use equity as a means for growth when they find parties they trust.

There are enlightened family businesses who have approached the stock market for finance to grow their businesses. Popular Holdings and Eu Yan Sang are two examples of listed Singapore companies that began as family-based businesses.

What about professional managers?
The distrust of non-family members also explains conservative management policies. There is a great reluctance to appoint outside professional managers and an unwillingness to accept outside advice. The FKTGT survey found that family business owners prefer to retain ownership and control within the family. 42.8 % were hesitant about share ownership with their employees. In a separate study involving nine case studies of professional managers who worked in Chinese family businesses in Singapore, it was found that professional managers faced challenges from within the family. As outsiders, their aspirations for the business often differed from those of the family owners. One area where this was most evident is the role of family members, and old and loyal employees. Four of the nine managers decided to leave the employment of the family firms. Considering that these people were hired because of their top-class management skills, the likely reason for their departure is over the leadership of the business. Their capabilities notwithstanding, leadership would always remain with the family.
Not all Chinese family businesses in Singapore could be considered inward-looking. There are family businesses that have learned how to engage and involve professional managers.
Popular Holdings is venturing into the e-learning arena from its traditional retail books and stationery products. It has introduced professional managers. The family business leader has recruited the talent needed for this task.
Eu Yan Sang has embarked on an ambitious branding exercise to introduce traditional Chinese medicines and therapies to the world. Richard Eu, the third generation family member had to fight his own family members to assume leadership of the business. Having appeased the other family members, he took sole leadership of the company. Since then he has sought to modernise the business and establish its brand. Recently, the company is finding ways to protect the Chinese herbal remedies through intellectual property rights and to enhance the credibility of their therapeutic qualities.
Family businesses have been traditionally plagued in their growth by the succession issue. Businesses often falter by the wayside in the failure on the part of the incumbent leader to plan for succession and power struggles between family members. Chinese family businesses are also known for preferring that their children take over the reins of their businesses. In our survey, 58% said their children should be involved in the business only if they wanted; 18.8% did not intend their children to join the business; while 13.8% would like their children to be involved in the business.

Furthermore, 65% of them agreed that their children should enter the business at a low level and learn the business from bottom up and 50.8% of them said that the children should receive shares if they join the business.

In general, family business owners appear willing to let their children join the business, although they would not be perturbed if they did not. The growth and dynamism of the business may be hampered if current owner-mangers harbour hopes for the children to take over the business but the children end up selecting an alternative career instead. While waiting for the prospective successor from among their children, the business may fail to make the necessary changes for further growth. The reservation of leadership for the children by the business-owners may have a negative impact on existing staff. Business leaders need to be open to the possibility of having existing capable managers either take over or recruit managers externally. This is especially so if there does not seem to be a suitable candidate in the family.

Future outlook
Our research shows a high proportion of the family businesses appear to be enlightened. Not many of them insist their children join the business so they may be prepared to hire professional managers in their businesses. They are open to children not joining their business, to employees having a stake and are not in favour of deferential treatment of family members.

But there are challenges. Many family businesses are reluctant to hand over control of the business totally to children or others as a majority preferred to see founders or subsequent generations having a formal role in the business. Some of them (32.2%) would prefer not to retire from the business when the children are ready to take over. This reluctance to relinquish control and management could be a hindrance to the growth of the business: there would not be clear leadership of the business should the founders or preceding generations persist in having a role. Succession is successful when the new leaders are in place to take the business onto the next phase of growth.

While they are prepared to grow the business, they were concerned about the introduction of outsiders who might lead to anticipated change. There was also concern over the loss of control with the introduction of outsiders. The business owners were more inclined offer employees a stake in the business. They also appear to be prepared to receive outside assistance from professionals who understand the issues involved in their business. They are somewhat hesitant and cautious about introducing outside shareholders.

Despite these findings, there are exceptional Chinese family businesses in Singapore. Their sterling performance indicates the promise and potential that family firms hold. Family businesses possess the potential to perform well because they are relatively straight forward in terms of planning, especially if it is an inter-generational family business. Family businesses also tend to be more united and purposeful because of the blood ties involved. If they can harness all these strengths, we should expect to see greater contributions to Singapore's economy.

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